The amazing growth of digital native vertical brands

As everyone knows, the usual buying process implies several steps. Take, for example, the purchase of a new mattress. First of all, you have to decide the right shop: is the one at the corner? Or maybe the new one opened just three weeks ago? Moreover, you need time to physically go out from home, reach the shop, take your mattress and come back to home. When you finally find the shop and time…Look at the price. You clearly can’t afford it. So, probably considerable time will pass before you will be able to buy your new, comfortable and spacious mattress. That was definitely true before the surge of companies who started selling specific category of products online focusing their business on online channels. In other words, digital native vertical brands.

As Andy Dunn, CEO of Bonobos (the 350-employee clothing retailer based in New York City) recently said, digital native vertical brands (from now on, called DNVB) are "brands born on and primarily experienced via the internet that feature a vertically-oriented business model which combines the margin of the retailer and that of the brand". In the last few years, those kinds of brands have been expanding worldwide in a variety of categories, as eyeglasses, razors, mattresses and food, just to name a few.

Market features

DNVB usually present four features. First of all, as the own definition says, a digital native brand was born online so interactions, transactions, and stories-telling to consumers are all provided via web and desktop only. Moreover, the brand is totally vertical and strongly focused on customer experience that is a three-part bundle of physical product, web experience, and customer service. Finally, eventually the brand extends offline through its own experiential physical retail or highly selective partnerships. However, physical stores usually represent only a small part of total business and are meant as a “touch point” that integrates the online experience with an in-person involvement.

As the purchasing service is mainly provided online, DNVB don’t consider intermediate distribution channels and cut cost that they usually imply. The longer the distribution channel, the more costs can be cut and the cheaper the final product. That is why DNVB usually born in markets characterized by long distribution channels. Another particular feature of digital native vertical brands' market is practically non-existence of entry barriers. However, they have to take care of some matters as, for example, the need to aggregate production from different providers, especially in the case of multi-components products like some of the ones listed in the next paragraph. Moreover, due to their relatively young age digital native brands could meet some difficulties in scaling the market: think about a very traditional sector, as the shoe one, strongly populated by physical retailers who usually have long business experiences. Just think about Zalando, German-based fashion and technology company, originally created to sell shoes, that today has been transformed into a multi-service platform that just in 2016 has gained 2.547M euro, + 21,9% with respect to 2015. To let customers trust the brand and thus scaling the market, a great digital native brand's team should have strong marketing and data analysis skills: efficient digital marketing campaigns and considerable business intelligence researches are pivotal for the company's success.

Now, take a look at traditional retailers. Why are they not launching a business as profitable as the DNVB one? The answer is easy: if they did it, they would face some pricing issues and end up cannibalizing their own sales that take place through traditional distribution channels. Take, for example, the luggage market and a giant like Samsonite born more than 100 years ago. Samsonite gives its customers the possibility to purchase online but prices are almost the same than in physical shops because if they were lower no one would go again in shops. Moreover, in order to fully develop an online channel, they might jeopardize solid relationships with their physical retailers.

To evaluate the phenomenon’s scope, Medium - famous online publishing platform developed by Twitter co-founder Evan Williams – has created a compendium of DNVBs where every digital native brand with observes a $5M run-rate min can be collected. Among these, you find also the U-Start Club Portfolio company Horizn Studios and ALOHA. The list currently counts 86 companies from different geographies, sectors, and sizes.

Successful stories

As the compendium shows, the phenomenon of DNVB is showing up worldwide but some companies are more brilliant than others and have already reached great revenues. Here an overview of the most famous examples in the VC world:

Warby Parker: founded by four Wharton classmates (Neil Blumenthal, Dave Gilboa, Andrew Hunt, Jeffrey Raider), Warby Parker is disrupting the eyewear industry offering affordable glasses to everyone who needs them. As the greatest business ideas, its project comes from a careful observation of reality, mixed with the will to act. In the U.S. private health care system is really expensive and often people can’t afford medical therapies or devices. By selling vintage-inspired eyeglasses and sunglasses directly to consumers worldwide through its website and 10 brick-and-mortar retail stores around the U.S., the company can offer high-quality glasses for around $95 a pair and compete with the few large companies who have always controlled the market and kept prices for frames and prescription lenses artificially high. Launched in 2010 the company has raised $371.36M in 6 rounds from 24 investors. They include First Round, Tiger Global Management, General Catalyst Partner and T. Rowe Price.

Dollar Shave Club: LA brand of men’s grooming products born in 2010, it monthly sends razor blades, towelettes, shaving butter and hair-styling products to its 2 million subscribers. An interesting thing about Dollar Shave Club is that it found a way to conquer customer’s trust and, so, scale the market: offering the first month of subscription free. Not bad right? It also the strategy of huge online service providers as Netflix (video streaming service) and Spotify (music streaming service) and, the numbers speak for themselves, seems work. Moreover, customers can change monthly razors plan anytime and adjust shipment frequency as they don’t feel trapped in the umpteenth subscription service that maybe is not so necessary. Co-founded by Mark Levine and Michael Dubin the company has raised $163.5M in 5 round from 22 investors (among these TCV, Founders Circle Capital, Venrock and Kleiner Perkins Caufield & Byers) has recently been acquired by Unilever.

Casper: online bed-in-a-box maker co-founded by Neil Parikh, Gabriel Flateman, Philip Krim, T. Luke Sherwin and Jeff Chapin, Casper produces the best mattress possible at an affordable price and deliver it quickly, for free, with a 100-day trial period. Casper sells just one type of mattress, dubbed "The Casper Mattress" because prefers "to put all our energy into building the ideal bed rather than confuse you with tens (or hundreds) of models that all start to feel the same after a while”. That is probably one of the reasons for this production choice. The second one is, obviously, that producing just one kind of mattress means to reduce production costs and, so, to offer consumers lower sale prices. Born in 2014, the New York City brand had sales of $1 million in its first month and in less than two years has become a $100M company. At present Casper has raised $71.2M in 4 Rounds and has baited investors like IVP, Lerer Hippeau Ventures, and New Enterprise Associates.

Blue Nile: online retailer selling certified diamonds, engagement rings, and fine jewelry, Blue Nile has started its adventure in 1995 when a Seattle jeweler looked to take advantage of the internet boom launching the first website version that originally had another name. Three years later came Mark Vadon, a well-paid management consultant at Bain & Company looking for an engagement ring. Mr. Vadon, Blue Nile co-founder, first went to Tiffany’s but his purchasing experience was definitely not so good. He then tried Blue Nile website, grasped its huge potential for growth and started raising venture capital funding. Moreover, he acquired 85% of the company for $5M. In 1999 company’s name was changed in Blue Nile. After an explosive growth and more than $49M collected in funding from investors such as Bessemer Venture Partners, Kleiner Perkins Caufield & Byers, Trinity Ventures, Vulcan Capital and Lightspeed Venture Partners, the company has reached the biggest goal ever as Bain Capital Private Equity and Bow Street declared that they will acquire Blue Nile for about $500 million in cash. Shareholders will receive $40.75 per share, representing a 34% premium over Blue Nile’s closing price on Friday, 11th of November, in a transaction expected to close in the first 2017 quarter.

Conclusions

DNVB’s widespread availability marks the start of a new commerce era, based on the assumption that customers’ purchase experience is starting more and more online: consumers have a propensity for doing their purchases just sitting on their sofas and DNVB are there to satisfy this kind of need. As DNVB were born just a few years ago their net promoter scores are still off the charts. Also, it is too early to know if they can scale to profitability (except for some cases, as Bonobos). However, their widespread growth worldwide and the first success stories seem to point towards a promising future and this new commercial ecosystem will offer profound business opportunities to investors, entrepreneurs and customers.

CASE STUDY

Bonobos – take the online experience offline

Bonobos is an e-commerce brand selling men’s clothes. Started in 2007 by selling just pants that fit greatly, since launching Bonobos has expanded its inventory to include men’s shirts, sweaters, jackets, a golf line and a women’s brand. Their online buying experience is easy, quick and fun and you can buy and return clothes by mail without handling or return shipping charges. Co-founded by Brian Spaly and Andy Dunn, its present CEO, Bonobos has already raised around 117.4M euro in seven funding from 15 investors including Coppel Capital, Acel Partners, Nordstrom and Lightspeed Venture Partners. Just in 2015, the company had more than 250.000 customers who made a purchase and non-pants items accounted for more than half of all sales. The company had recently become profitable and in 2015 approached 90M euro in annual gross revenues.

As digital native vertical brand, Bonobos started operating exclusively online but recently decided to move its first steps in physical retail world. He firstly did a partnership with Nordstrom, a huge American chain of department stores who currently sell also Bonobos products, and then opened in malls stores called Guideshops. Today exists 29 Guideshops, spread across U.S.A. They are clothing store for the digital era, in other words, stores where customers can go to fit Bonobos' clothes previously seen online. The key benefit is the availability of the largest range of fit, color, and size combinations in market. Sales assistants, called Guides, first fit and style the customer perfectly and then place the order and ship it to him.

Physical stores represent only a small part of the whole business, as business focus is on online channels. However, Guideshops bring a couple of relevant benefits to Bonobos: more advertisements for the company and customers’ attachment to the brand as, after purchasing, frequently clients come back or shop the web. Guideshops are a kind of experiment: if the stores fail, malls are dead. If not, malls are safe as physical customer experience is. Currently, Guideshops are flourishing, (in the last 21 months Bonobos opened 15 new stores) and it is almost certain than Bonobos has found the right way to expand its digital native brand empire also off-line.

What will be the next step for this amazing company? Bonobos CEO, Andy Dunn, speaks about building the greatest multi-brand digital native company in the market. In the future, Bonobos could deliver customers several kind of clothes and for all the family. So, start thinking about next Christmas: maybe that super cute Bonobo’s jumper could be the perfect present for your mother.

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Last Update: July 2018

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